Sales Tax Rate on Utility Sales

State law limits both state and local sales taxes on water, gas, electricity, and other energy sources used by manufacturers. Your city needs to ensure that your utility billing system reflects these different rates. If you have been overcharging your manufacturer utility customers, you may owe them a refund.

Water
Tennessee Code Annotated (T.C.A.) § 67-6-206(b)(1) provides for a lower state sales tax of one percent (1%) applied to sales of water used by manufacturers. T.C.A. § 67-6-702(b) also limits the local sales tax rate on such water sales to one-third of one percent (0.33%) whenever the local tax does not exceed one percent (1%) and at the rate of one-half of one percent (0.5%) whenever the rate of local tax exceeds one percent (1%). This combined one and one-half percent (1.5%) maximum rate is in lieu of the combined state and local sales tax levied on residential water sales. Normal residential water sales are taxed at the seven percent (7%) state rate plus your local rate, which could result in nine and three-fourths percent (9.75%) with a maximum two and three-fourths percent (2.75%) local rate.

Energy
T.C.A. § 67-6-206(b)(1) also provides that a tax at the rate of one and one-half percent (1.5%) shall be imposed with respect to gas, electricity, fuel oil, coal, and other energy fuels when sold to or used by manufacturers. T.C.A. § 67-6-704 provides that local sales tax does not apply to sales of electric power or energy, natural or artificial gas, coal, fuel oil, or certain other energy sources. This state-only sales tax is in lieu of the combined state and local sales tax levied on other taxable sales (seven percent [7%] state rate plus your local rate).

Manufacturer Defined
T.C.A. § 67-6-206(b)(2) describes a manufacturer as one whose principal business is fabricating or processing tangible personal property for resale.

Exemptions from Sales Tax
T.C.A. § 67-6-206(b)(3) provides that water and energy fuels are exempt from sales tax when it is established to the satisfaction of the Commissioner of Revenue, by separate metering or otherwise, that they are exclusively used directly in the manufacturing process, come into direct contact with the article being fabricated or processed, and are expended in the course of that contact. The manufacturer must establish its eligibility for the exemption and provide the appropriate documentation to the municipality.

Refunds of Tax Overpayments
Previous collections that resulted in an overpayment should be refunded or credited to the customer. T.C.A. § 67-1-1802 governs claims for refunds of taxes paid in error. Generally, a claim for refund must be filed with the Commissioner within three years from December 31 of the year in which the payment was made. Tennessee law also requires a dealer that has collected sales tax from a customer to refund or credit the tax to the customer before the dealer may receive a refund from the Department. The Department of Revenue has a form (RV-F0102401) that the municipality must complete and return with documentation showing that it has refunded the correct amount.